United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
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þ
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Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2007.
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o
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Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
.
Commission file number :
0-25679
BROOKE CAPITAL CORPORATION
(Exact Name of small business issuer in its charter)
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Kansas
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48-1187574
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(State of incorporation)
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(I.R.S. Employer Identification Number)
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8500 College Blvd., Overland Park, KS 66210
(Address of principal executive offices)
Issuers telephone number
(913) 661-0123
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
þ
No
o
State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date.
Common Stock, $.01 Par Value 3,475,817 shares as of October 31, 2007
Transitional Small Business Disclosure Format (check one): Yes
o
No
þ
BROOKE CAPITAL CORPORATION
INDEX TO FORM 10-QSB
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROOKE CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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September 30,
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December 31,
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2007
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2006
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Assets
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Investments:
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Securities available-for-sale, at fair value:
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Fixed maturities (amortized cost, $18,182,533
in 2007 and $12,532,067 in 2006)
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$
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17,704,776
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$
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12,298,780
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Equity securities (cost of $239,250 in 2007
and $258,400 in 2006)
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230,809
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283,060
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Investments in real estate
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274,564
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274,564
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Policy loans
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170,454
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166,026
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Mortgage loans on real estate
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1,879,190
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1,937,281
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Other investments
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3,363,497
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3,067,369
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Total investments
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23,623,290
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18,027,080
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Cash and cash equivalents
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2,202,624
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3,542,928
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Accrued investment income
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296,396
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233,858
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Accounts receivable
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308,342
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281,894
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Reinsurance receivables
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235,160
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112,145
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Deferred policy acquisition costs (net of accumulated
amortization of $4,998,664 in 2007 and $4,449,936 in 2006)
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5,390,323
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5,209,693
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Property and equipment (net of accumulated depreciation
of $1,040,187 in 2007 and $945,228 in 2006)
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2,569,374
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2,627,586
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Other assets
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3,968,976
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1,221,559
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Total assets
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$
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38,594,485
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$
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31,256,743
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See notes to condensed consolidated financial statements.
3
BROOKE CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
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(Unaudited)
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September 30,
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December 31,
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2007
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2006
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Liabilities and Shareholders Equity
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Policy and contract liabilities:
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Future annuity benefits
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$
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18,103,092
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$
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13,658,174
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Future policy benefits
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6,786,333
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6,109,055
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Liability for policy claims
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136,157
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211,932
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Policyholder premium deposits
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82,755
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104,038
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Deposits on pending policy applications
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4,931
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27,788
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Reinsurance premiums payable
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43,015
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54,732
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Amounts held under reinsurance
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18,321
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Total policy and contract liabilities
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25,156,283
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20,184,040
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Commissions, salaries, wages and benefits payable
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207,135
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49,661
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Other liabilities
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534,128
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257,085
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Deferred federal income taxes payable
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421,992
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508,380
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Total liabilities
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26,319,538
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20,999,166
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Shareholders equity:
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Common stock, $.01 par value, 25,000,000 shares authorized;
3,475,817 issued and outstanding in 2007; and
2,666,666 issued and outstanding in 2006
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34,758
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26,667
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Additional paid in capital
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14,260,056
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14,530,631
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Accumulated deficit
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(1,630,895
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)
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(4,132,804
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)
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Accumulated other comprehensive loss
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(388,972
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)
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(166,917
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)
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Total shareholders equity
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12,274,947
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10,257,577
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Total liabilities and shareholders equity
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$
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38,594,485
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$
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31,256,743
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See notes to condensed consolidated financial statements.
4
BROOKE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
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(Unaudited)
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Three months ended
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Nine months ended
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September 30,
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September 30,
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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Revenues:
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Gross premium income
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$
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1,001,146
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$
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1,014,212
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$
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3,188,504
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$
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3,250,585
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Reinsurance premiums assumed
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|
6,980
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|
|
|
|
|
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16,038
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|
|
|
8,637
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|
Reinsurance premiums ceded
|
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(122,201
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)
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|
|
(143,560
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)
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|
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(396,392
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)
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|
|
(456,433
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)
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|
|
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Net premium income
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885,925
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870,652
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|
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2,808,150
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|
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2,802,789
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Net investment income
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390,437
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|
|
|
282,022
|
|
|
|
1,066,248
|
|
|
|
815,698
|
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Net realized investment gain (loss)
|
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|
864
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|
|
|
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81,458
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(70,017
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)
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Rental income
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59,886
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61,850
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|
179,079
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179,964
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Consulting fees and other income
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3,295,115
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|
923
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7,540,272
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2,228
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|
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|
|
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Total revenue
|
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4,632,227
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|
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1,215,447
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|
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11,675,207
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3,730,662
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Benefits and expenses:
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Increase in policy reserves
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195,593
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207,914
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677,279
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643,239
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Policyholder surrender values
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121,107
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103,454
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266,853
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251,375
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|
Interest credited on annuities and premium deposits
|
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|
212,053
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|
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|
150,542
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577,906
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|
|
|
419,789
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|
Death claims
|
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|
259,767
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|
|
183,106
|
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|
677,049
|
|
|
|
478,137
|
|
Commissions
|
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|
201,617
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|
|
|
194,601
|
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700,052
|
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620,220
|
|
Policy acquisition costs deferred
|
|
|
(240,266
|
)
|
|
|
(166,974
|
)
|
|
|
(729,358
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)
|
|
|
(604,225
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
190,059
|
|
|
|
159,256
|
|
|
|
548,728
|
|
|
|
524,999
|
|
Salaries, wages, and employee benefits
|
|
|
838,210
|
|
|
|
183,632
|
|
|
|
2,066,720
|
|
|
|
672,641
|
|
Miscellaneous taxes
|
|
|
33,140
|
|
|
|
37,167
|
|
|
|
91,484
|
|
|
|
96,519
|
|
Other operating costs and expenses
|
|
|
1,712,403
|
|
|
|
248,356
|
|
|
|
3,070,278
|
|
|
|
837,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
3,523,683
|
|
|
|
1,301,054
|
|
|
|
7,946,991
|
|
|
|
3,940,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (Loss) before income tax expense
|
|
|
1,108,544
|
|
|
|
(85,607
|
)
|
|
|
3,728,216
|
|
|
|
(209,712
|
)
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Income tax expense
|
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|
338,192
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|
|
|
|
|
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1,226,307
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
770,352
|
|
|
$
|
(85,607
|
)
|
|
$
|
2,501,909
|
|
|
$
|
(209,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Net Income (Loss) per common share basic and diluted
|
|
$
|
0.24
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.80
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
BROOKE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
770,352
|
|
|
$
|
(85,607
|
)
|
|
$
|
2,501,909
|
|
|
$
|
(209,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) during the period
|
|
|
154,971
|
|
|
|
635,421
|
|
|
|
(196,112
|
)
|
|
|
45,617
|
|
Less: Reclassification for gains included in net income
|
|
|
864
|
|
|
|
182,486
|
|
|
|
81,458
|
|
|
|
112,469
|
|
Tax benefit (expense)
|
|
|
(30,821
|
)
|
|
|
(90,588
|
)
|
|
|
55,515
|
|
|
|
12,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
123,286
|
|
|
|
362,347
|
|
|
|
(222,055
|
)
|
|
|
(54,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
893,638
|
|
|
$
|
276,740
|
|
|
$
|
2,279,854
|
|
|
$
|
(263,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements
.
6
BROOKE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,501,909
|
|
|
$
|
(209,712
|
)
|
Adjustments to reconcile net loss to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Interest credited on annuities and premium deposits
|
|
|
577,906
|
|
|
|
414,383
|
|
Net realized investment (gain) loss
|
|
|
(81,458
|
)
|
|
|
70,017
|
|
Provision for depreciation
|
|
|
95,577
|
|
|
|
107,395
|
|
Amortization of premium and accretion of discount on
fixed maturity and short-term investments
|
|
|
(157,481
|
)
|
|
|
(96,195
|
)
|
Acquisition costs capitalized
|
|
|
(729,358
|
)
|
|
|
(604,225
|
)
|
Amortization of deferred acquisition costs
|
|
|
548,728
|
|
|
|
524,999
|
|
Provision for deferred federal income taxes
|
|
|
(30,874
|
)
|
|
|
|
|
Provision for restricted stock awards
|
|
|
81,250
|
|
|
|
|
|
(Increase) decrease in assets:
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
(62,538
|
)
|
|
|
40,764
|
|
Accounts receivable
|
|
|
(26,448
|
)
|
|
|
4,462
|
|
Reinsurance receivables
|
|
|
(123,015
|
)
|
|
|
(16,877
|
)
|
Policy loans
|
|
|
(4,428
|
)
|
|
|
(60,236
|
)
|
Other assets
|
|
|
(2,747,417
|
)
|
|
|
(224,398
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Future policy benefits
|
|
|
677,278
|
|
|
|
643,240
|
|
Liability for policy claims
|
|
|
(75,775
|
)
|
|
|
(46,390
|
)
|
Deposits on pending policy applications
|
|
|
(22,857
|
)
|
|
|
16,560
|
|
Reinsurance premiums payable
|
|
|
(11,717
|
)
|
|
|
(52,360
|
)
|
Amounts held under reinsurance
|
|
|
(18,321
|
)
|
|
|
(175,599
|
)
|
Commissions, salaries, wages and benefits payable
|
|
|
157,474
|
|
|
|
(73,478
|
)
|
Other liabilities
|
|
|
277,043
|
|
|
|
67,766
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
825,479
|
|
|
$
|
330,116
|
|
See notes to condensed consolidated financial statements.
7
BROOKE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of available-for-sale fixed maturities
|
|
$
|
(5,910,308
|
)
|
|
$
|
(1,334,923
|
)
|
Sale of available-for-sale fixed maturities
|
|
|
|
|
|
|
2,258,015
|
|
Maturity of available-for-sale fixed maturities
|
|
|
224,001
|
|
|
|
571,000
|
|
Sale of available-for-sale equities
|
|
|
100,063
|
|
|
|
222,699
|
|
Additions to property and equipment
|
|
|
(37,365
|
)
|
|
|
(13,122
|
)
|
Purchase of other investments
|
|
|
(592,400
|
)
|
|
|
(1,593,368
|
)
|
Maturity of other investments
|
|
|
490,140
|
|
|
|
351,643
|
|
Purchase of mortgage loans
|
|
|
|
|
|
|
(167,000
|
)
|
Payments received on mortgage loans
|
|
|
58,091
|
|
|
|
42,428
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(5,667,778
|
)
|
|
|
337,372
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
|
|
|
|
(2,272,986
|
)
|
Deposits on annuity contracts
|
|
|
4,832,144
|
|
|
|
2,533,233
|
|
Surrenders on annuity contracts
|
|
|
(962,227
|
)
|
|
|
(437,115
|
)
|
Policyholder premium deposits
|
|
|
12,154
|
|
|
|
3,070
|
|
Withdrawals on policyholder premium deposits
|
|
|
(36,342
|
)
|
|
|
(42,301
|
)
|
Purchase of treasury stock
|
|
|
(738,037
|
)
|
|
|
|
|
Proceeds from redemption of warrant
|
|
|
394,303
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,501,995
|
|
|
|
(216,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(1,340,304
|
)
|
|
|
451,389
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
3,542,928
|
|
|
|
249,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,202,624
|
|
|
$
|
700,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash activities:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
62,295
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,160,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non cash transaction
|
|
|
|
|
|
|
|
|
Treasury shares used for restricted stock awards
|
|
$
|
738,037
|
|
|
$
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
8
BROOKE CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Brooke Capital Corporation (BCP
formerly First American Capital Corporation) and its Subsidiaries (collectively the Company) for
the three month and nine month periods ended September 30, 2007 and 2006 are unaudited. However,
in the opinion of the Company, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been reflected therein.
Certain financial information which is normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America, but which
is not required for interim reporting purposes, has been omitted. The accompanying condensed
consolidated financial statements should be read in conjunction with the Companys annual report
on Form 10-KSB for the fiscal year ended December 31, 2006. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for the full year.
Significant intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
A complete summary of significant accounting policies is included in the notes to the audited
consolidated financial statements included in the Companys annual report on Form 10-KSB for the
year ended December 31, 2006.
2. Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted net income (loss) is calculated by
including the weighted average effect of dilutive warrants outstanding during the periods. The
weighted average number of shares issuable upon the exercise of outstanding warrants assumes that
the applicable proceeds from such exercises are used to acquire treasury shares at the average
price of common stock during the periods. Basic and diluted net income (loss) per share for the
three month and nine month periods ended September 30, 2007 and 2006, were determined as follows
(adjusted for the 1-for-3 reverse stock split approved by the Companys shareholders on January 31,
2007 and effective as of April 13, 2007):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
770,352
|
|
|
$
|
(85,607
|
)
|
|
$
|
2,501,909
|
|
|
$
|
(209,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding (after
the effect of 1-for-3 reverse stock split) used
for basic earnings per share
|
|
|
3,196,034
|
|
|
|
1,419,019
|
|
|
|
3,108,422
|
|
|
|
1,419,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of assumed exercise of warrants to purchase
49,999 shares of stock at $5.16 per share, net of
adjustment to reflect purchase of treasury shares
with proceeds.
|
|
|
2,537
|
|
|
|
|
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for diluted earnings per share
|
|
|
3,198,571
|
|
|
|
1,419,019
|
|
|
|
3,109,277
|
|
|
|
1,419,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.80
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.80
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
2. Net Income (Loss) Per Common Share (continued)
On April 2, 2007, the Company concluded a modified Dutch auction tender offer for shares of its
common stock. The Company accepted for purchase 379,248 (126,416 post 1-for-3 reverse stock split)
shares of its common stock at a price of $1.60 ($4.80 post split) per share for an aggregate price
paid to shareholders of approximately $607,000. In connection with the execution of the reverse
stock split, the Company purchased an additional 2,253 shares of common stock in accordance with
its commitment to purchase for cash, any fractional shares that resulted from the reverse stock
split. As of October 31, 2007, the Company had 3,475,817 shares of common stock outstanding.
3. Federal Income Taxes
Current taxes are provided based on estimates of the projected effective annual tax rate. Deferred
taxes reflect the net effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The
Company has elected to file a consolidated federal income tax return with its subsidiaries, First
Life America Corporation (FLAC) and Brooke Capital Advisors, Inc., (BCA) for 2007 and 2006.
FLAC is taxed as a life insurance company under the provisions of the Internal Revenue Code and had
to file a separate tax return for its initial five years of existence, which covers the period from
November 1998 through December 31, 2002.
4. Reinsurance
Effective September 29, 2005, the Company and Wilton Reassurance Company (Wilton Re), of Wilton,
CT, executed a binding letter of intent whereby both parties agreed that the Company would cede the
simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Re on a
50/50 quota share original term coinsurance basis. The letter of intent was executed on a
retroactive basis to cover all applicable business issued by the Company subsequent to January 1,
2005. Wilton Re has agreed to provide various commission and expense allowances to the Company in
exchange for the Company ceding 50% of the applicable premiums to Wilton Re as they are collected.
As of June 24, 2006, Wilton Re terminated the reinsurance treaty, for new business issued after the
termination date.
5. Other Regulatory Matters
The Company believes that it is currently in material compliance with all state, federal and
foreign regulations to which the Company is subject and the Company is unaware of any pending or
threatened investigation, action or proceeding by any state federal or foreign regulatory agency
involving the Company that would have a material adverse effect on the Companys operations.
FLAC is licensed to transact life and annuity business in the states of Kansas, Texas, Illinois,
Oklahoma, North Dakota, Kentucky, Nebraska and Ohio. In the fourth quarter 2005, Ohio suspended
FLACs license because its statutory capital and surplus fell below the minimum amount of
$2,500,000 as of September 30, 2005. This shortfall was corrected as of December 31, 2005 and Ohio
reinstated FLACs license in 2006. FLAC operated under a Confidential Memorandum of Understanding
(MOU) which restricted its ability to write new business in Ohio until May 3, 2007, when FLAC was
released from its MOU with the Ohio Department of Insurance. FLAC is now working to re-establish
relationships with agents in that market.
6. Stock-Based Compensation
The Brooke Capital Corporation 2007 Equity Incentive Plan (the Plan), which is
shareholder-approved, allows the Company to provide incentives and rewards to those employees and
directors largely responsible for the success and growth of Brooke Capital Corporation and its
direct and indirect subsidiaries. The Company believes that such incentives and rewards more
closely align the interests of such persons with those of the shareholders of Brooke Capital
Corporation.
10
6. Stock-Based Compensation (continued)
The Plan authorizes the issuance of up to 2,400,000 shares of Company common stock to be issued
pursuant to awards made under the Plan in the form of non-qualified stock options, incentive stock
options, restricted shares of common stock, stock appreciation rights, performance units and
restricted share units. On August 15, 2007, the Compensation Committee of the Board of Directors
of Brooke Capital Corporation awarded 390,000 restricted shares to officers and directors of the
Company or its subsidiary.
Pursuant to the Restricted Shares Agreement between the Company and each recipient, the recipients
are entitled to receive dividends and vote their shares in matters submitted to shareholder vote.
Transfer restrictions lapse in one-third annual increments and will automatically lapse upon the
sale of all or substantially all of the assets of the Company or the sale by Brooke Corporation,
the Companys controlling shareholder, of all of its Company common stock.
The fair value of an award is determined based upon the market price for the Companys common stock
during the 10 consecutive trading days immediately preceding the valuation date, as set forth in
the Plan. As the shares of the Companys common stock were not listed for trading on any exchange
on the award date (prior to their listing on the American Stock Exchange on August 30, 2007), the
Compensation Committee determined the fair value for the restricted share awards granted on August
15, 2007 to be $5.00 per share, as provided under the terms of the Plan.
During the three month period ended September 30, 2007, $81,250 in compensation cost along with
related deferred income tax benefits of $30,874, have been recorded by the Company. As of
September 30, 2007, there was $1,868,750 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. That cost is expected to
be recognized on a straight-line basis over the remaining terms of the three year vesting periods
ending on August 15, 2010.
11
7. Financial Information Relating to Industry Segments
The operations of the Company and its subsidiaries have been classified into three operating
segments as follows: life and annuity insurance operations (conducted by FLAC and by BCP pursuant
to a shared Services Agreement); brokerage operations conducted by BCA and corporate operations.
All sales of life insurance by FLAC are to unaffiliated customers. Financial information related
to these three segments of the Companys business is presented below as of the dates and for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and annuity insurance operations
|
|
$
|
1,316,277
|
|
|
$
|
1,215,217
|
|
|
$
|
4,024,718
|
|
|
$
|
3,648,573
|
|
Brokerage operations
|
|
|
3,295,114
|
|
|
|
870
|
|
|
|
7,540,246
|
|
|
|
2,140
|
|
Corporate
|
|
|
20,836
|
|
|
|
(640
|
)
|
|
|
110,243
|
|
|
|
79,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,632,227
|
|
|
$
|
1,215,447
|
|
|
$
|
11,675,207
|
|
|
$
|
3,730,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and annuity insurance operations
|
|
$
|
(12,504
|
)
|
|
$
|
42,058
|
|
|
$
|
210,620
|
|
|
$
|
218,834
|
|
Brokerage operations
|
|
|
1,926,897
|
|
|
|
(1,827
|
)
|
|
|
4,859,337
|
|
|
|
(8,253
|
)
|
Corporate
|
|
|
(805,848
|
)
|
|
|
(125,839
|
)
|
|
|
(1,341,741
|
)
|
|
|
(420,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,108,544
|
|
|
$
|
(85,608
|
)
|
|
$
|
3,728,216
|
|
|
$
|
(209,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and annuity insurance operations
|
|
$
|
210,423
|
|
|
$
|
175,494
|
|
|
$
|
603,976
|
|
|
$
|
553,203
|
|
Brokerage operations
|
|
|
49
|
|
|
|
98
|
|
|
|
146
|
|
|
|
390
|
|
Corporate
|
|
|
12,886
|
|
|
|
9,211
|
|
|
|
40,183
|
|
|
|
63,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
223,358
|
|
|
$
|
184,803
|
|
|
$
|
644,305
|
|
|
$
|
616,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
|
|
Life and annuity insurance operations
|
|
$
|
33,361,378
|
|
|
$
|
28,570,332
|
|
Brokerage operations
|
|
|
4,789,342
|
|
|
|
1,198,212
|
|
Corporate
|
|
|
443,765
|
|
|
|
1,488,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,594,485
|
|
|
$
|
31,256,743
|
|
|
|
|
|
|
|
|
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-QSB for the quarter and nine month period ended September 30, 2007 includes
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 and is subject to the safe harbor created by that act. Among other things, these statements
relate to the Companys financial condition, results of operations and business. These
forward-looking statements are generally identified by the words or phrases would be, will
allow, expect to, intend to, will continue, is anticipated, estimate, plan, may,
believe, implement, build, project or similar expressions and references to strategies or
plans.
While the Company provides forward-looking statements to assist in the understanding of the
Companys anticipated future financial performance, the Company cautions readers not to place undue
reliance on any forward-looking statements, which speak only as of the date that the Company makes
them. Forward-looking statements are subject to significant risks and uncertainties, many of which
are beyond the Companys control. Although the Company believes that the assumptions underlying
its forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate.
Actual results may differ materially from those contained in or implied by these forward-looking
statements for a variety of reasons. These risks and uncertainties are discussed in more detail in
the Companys annual report on Form 10-KSB for the fiscal year ended December 31, 2006, in its
other filings with the Securities and Exchange Commission, and in this section of this report and
include, but are not limited to: the uncertainty that plans relating
to the Companys acquisition by merger of an insurance agency
franchise business and the Companys acquisition of a
non-standard auto insurance company will be successfully implemented, the uncertainty as to the effect of the
potential transaction on the earnings and operations of the Company; the uncertainty that the
Company will achieve short-term and long-term profitability and growth goals, uncertainties
associated with market acceptance of and demand for the products and services of the Company or
its subsidiaries, the impact of competitive products and pricing, the dependence on third-party
suppliers and their pricing, the availability of capital and funding sources, the exposure to
market risks, uncertainties associated with the development of technology, changes in the law and
in economic, political and regulatory environments, the impact of inflation and general economic
conditions on the Companys liquidity and capital resources, changes in management, the dependence
on intellectual property rights, the effectiveness of internal controls, and risks and factors
described from time to time in reports and registration statements filed by the Company with the
Securities and Exchange Commission. When considering forward-looking statements, you should keep
these factors in mind as well as the other cautionary statements in this report. You should not
place undue reliance on any forward-looking statement. The Company is not obligated to update
forward-looking statements.
The following discussion should be read in conjunction with the consolidated financial statements
and notes thereto.
Critical Accounting Policies and Estimates
The accounting policies below have been identified as critical to the understanding of the results
of operations and financial position. The application of these critical accounting policies in
preparing the financial statements requires management to use significant judgments and estimates
concerning future results or other developments, including the likelihood, timing or amount of one
or more future transactions. Actual results may differ from these estimates under different
assumptions or conditions. On an ongoing basis, estimates, assumptions and judgments are evaluated
based on historical experience and various other information believed to be reasonable under the
circumstances.
Consulting Fees.
Brooke Capital Advisors, Inc. (BCA) uses its industry contacts and expertise in
insurance brokerage to broker loans for, and consult with, managing general agencies and managing
general agencies that own insurance companies, specializing in hard-to-place insurance sales,
captive insurance agencies and funeral homes. BCA receives consulting fees for these activities.
The fees associated with this service are recognized upon loan closing as all of the
consulting services related to the transaction have been provided by BCA at or prior to closing.
BCA will also use its expertise in the hard-to-place and niche insurance industry to preserve
collateral and monitor insurance agency borrowers on behalf of lenders. Fees are received for this
collateral preservation activity. An initial fee is received and recognized upon loan closing.
Ongoing fees are received monthly from these activities and are recognized as services are
provided.
13
Investments.
The Company classifies all of its fixed maturity and equity investments as
available-for-sale. Available-for-sale fixed maturities are carried at fair value with unrealized
gains and losses, net of applicable taxes, reported in other comprehensive income. Equity
securities are carried at fair value with unrealized gains and losses, net of applicable taxes,
reported in other comprehensive income. Mortgage loans on real estate are carried at cost less
principal payments. Other investments are carried at amortized cost. Discounts originating at the
time of purchase, net of capitalized acquisition costs, are amortized using the level yield method
on an individual basis over the remaining contractual term of the investment. Policy loans are
carried at unpaid balances. Cash equivalents consist of highly liquid investments with maturities
of three months or less at the date of purchase and are carried at cost, which approximates fair
value. Realized gains and losses on sales of investments are recognized in operations on the
specific identification basis. Interest earned on investments is included in net investment income.
Deferred Policy Acquisition Costs.
Commissions and other costs of acquiring life insurance, which
vary with, and are primarily related to, the production of new business have been deferred to the
extent recoverable from future policy revenues and gross profits. The acquisition costs are being
amortized over the premium paying period of the related policies using assumptions consistent with
those used in computing policy reserves.
Future Policy Benefits.
Traditional life insurance policy benefit liabilities are computed on a
net level premium method using assumptions with respect to current yield, mortality, withdrawal
rates, and other assumptions deemed appropriate by the Company.
Future Annuity Benefits.
Annuity contract liabilities are computed using the retrospective deposit
method and consist of policy account balances before deduction of surrender charges, which accrue
to the benefit of policyholders. Premiums received on annuity contracts are recognized as an
increase in a liability rather than premium income. Interest credited on annuity contracts is
recognized as an expense.
Premiums.
Premiums for traditional life insurance products are reported as revenue when due.
Traditional insurance products include whole life and term life. Deposits relate to deferred
annuity products. The cash flows from deposits are credited to policyholder account balances.
Deposits are not recorded as revenue.
Income Taxes.
Deferred income taxes are recorded on the differences between the tax bases of
assets and liabilities and the amounts at which they are reported in the consolidated financial
statements. Recorded amounts are adjusted to reflect changes in income tax rates and other tax law
provisions as they become enacted.
Reinsurance.
Reinsurance is one of the tools that the Company uses to accomplish its business
objectives. A variety of reinsurance vehicles is currently in use. Reinsurance supports a multitude
of corporate objectives including managing statutory capital, reducing volatility and reducing
surplus strain. At the customer level it increases the Companys capacity, provides access to
additional underwriting expertise, and generally makes it possible for the Company to offer
products at competitive levels that the Company could not otherwise bring to market without
reinsurance support.
14
Results of Operations and Financial Condition
The Companys consolidated results of operations continued to improve as a result of the expansion
of its loan brokerage activities beginning in the fourth quarter of 2006 pursuant to a brokerage
agreement with a Brooke Corporation (Brooke) subsidiary. Brooke continues to own a majority of
the Companys common stock, and is expected to increase its ownership level to over 81% as a result
of two transactions that are expected to cluse during the fourth quarter 2007. That activity and
other significant aspects of the Companys operations during the nine month period ended September
30, 2007 are discussed below as to their impact on the Companys results and financial condition.
The following table shows revenues and expenses (in thousands, except percentages) for the three
and nine month periods ended September 30, 2007 and 2006, along with selected percentage changes
from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Three months ended
|
|
|
% increase
|
|
|
Nine months ended
|
|
|
% increase
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(decrease)
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
over 2006
|
|
|
2007
|
|
|
2006
|
|
|
over 2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premium income
|
|
$
|
1,001
|
|
|
$
|
1,015
|
|
|
|
|
|
|
$
|
3,189
|
|
|
$
|
3,251
|
|
|
|
|
|
Reinsurance premiums assumed
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
9
|
|
|
|
|
|
Reinsurance premiums ceded
|
|
|
(122
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
(396
|
)
|
|
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium income
|
|
|
886
|
|
|
|
871
|
|
|
|
2
|
%
|
|
|
2,808
|
|
|
|
2,803
|
|
|
|
0
|
%
|
Net investment income
|
|
|
390
|
|
|
|
282
|
|
|
|
38
|
%
|
|
|
1,066
|
|
|
|
816
|
|
|
|
31
|
%
|
Net realized investment gain (loss)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
(70
|
)
|
|
|
|
|
Rental income
|
|
|
60
|
|
|
|
62
|
|
|
|
|
|
|
|
179
|
|
|
|
180
|
|
|
|
|
|
Consulting fees and other income
|
|
|
3,294
|
|
|
|
1
|
|
|
|
|
|
|
|
7,540
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,631
|
|
|
|
1,215
|
|
|
|
281
|
%
|
|
|
11,675
|
|
|
|
3,731
|
|
|
|
213
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in policy reserves
|
|
|
196
|
|
|
|
208
|
|
|
|
-6
|
%
|
|
|
677
|
|
|
|
643
|
|
|
|
5
|
%
|
Policyholder surrender values
|
|
|
121
|
|
|
|
103
|
|
|
|
17
|
%
|
|
|
267
|
|
|
|
251
|
|
|
|
6
|
%
|
Interest credited on annuities and
premium deposits
|
|
|
212
|
|
|
|
151
|
|
|
|
41
|
%
|
|
|
578
|
|
|
|
420
|
|
|
|
38
|
%
|
Death claims
|
|
|
260
|
|
|
|
183
|
|
|
|
42
|
%
|
|
|
677
|
|
|
|
478
|
|
|
|
42
|
%
|
Commissions
|
|
|
202
|
|
|
|
195
|
|
|
|
4
|
%
|
|
|
700
|
|
|
|
620
|
|
|
|
13
|
%
|
Policy acquisition costs deferred
|
|
|
(240
|
)
|
|
|
(167
|
)
|
|
|
44
|
%
|
|
|
(729
|
)
|
|
|
(604
|
)
|
|
|
21
|
%
|
Amortization of deferred policy
acquisition costs
|
|
|
190
|
|
|
|
159
|
|
|
|
19
|
%
|
|
|
549
|
|
|
|
525
|
|
|
|
5
|
%
|
Salaries, wages, and employee benefits
|
|
|
838
|
|
|
|
184
|
|
|
|
356
|
%
|
|
|
2,067
|
|
|
|
673
|
|
|
|
207
|
%
|
Miscellaneous taxes
|
|
|
33
|
|
|
|
37
|
|
|
|
-11
|
%
|
|
|
91
|
|
|
|
97
|
|
|
|
-5
|
%
|
Other operating costs and expenses
|
|
|
1,710
|
|
|
|
249
|
|
|
|
586
|
%
|
|
|
3,069
|
|
|
|
838
|
|
|
|
266
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
3,524
|
|
|
|
1,301
|
|
|
|
171
|
%
|
|
|
7,947
|
|
|
|
3,940
|
|
|
|
102
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income tax expense
|
|
|
1,109
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
3,728
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
770
|
|
|
$
|
(86
|
)
|
|
|
|
|
|
$
|
2,502
|
|
|
$
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Brokerage Operations
The Company reported higher levels of revenue during the third quarter of 2007 compared to the
third quarter of 2006 as a result of its ability to broker loans to managing general insurance
agencies through its subsidiary, BCA. During this period, BCA generated about $2,900,000 in loan
and other related fees. These amounts, along with other loan brokerage consulting related fees
totaled $3,295,000 for the third quarter of 2007 and $7,540,000 for the nine months ended September
30, 2007. Virtually no similar fees were reported during the first nine months of 2006. Income
before taxes from the loan brokerage subsidiary was about $1,927,000 and $4,859,000 during the
three and nine month periods ended September 30, 2007.
15
Significant expenses related to the loan brokerage activity for the three and nine month periods
ended September 30, 2007 included salaries, wages and employee benefits of about $404,000 and
$1,038,000, respectively. Incentive compensation related to third quarter loan closings is the
primary reason for the increase in commissions and payroll related amounts payable at September 30,
2007. Other significant expenses during the three and nine month periods ended September 30, 2007
included loan brokerage expenses of about $443,000 and $568,000, respectively and shared services
expenses of $435,000 and $870,000, respectively, paid to Brooke Corporation.
Life and Annuity Operations
The following table provides information concerning net premium income, in thousands, reported by
the Companys life insurance subsidiary, FLAC, during the three and nine month periods ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Three months ended
|
|
|
% increase
|
|
|
Nine months ended
|
|
|
% increase
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(decrease)
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
over 2006
|
|
|
2007
|
|
|
2006
|
|
|
over 2006
|
|
First year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance premiums
|
|
$
|
118
|
|
|
$
|
139
|
|
|
|
|
|
|
$
|
356
|
|
|
$
|
556
|
|
|
|
|
|
Reinsurance premiums
ceded
|
|
|
0
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net first year
premium income
|
|
|
119
|
|
|
|
93
|
|
|
|
28
|
%
|
|
|
337
|
|
|
|
329
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance premiums
|
|
|
881
|
|
|
|
872
|
|
|
|
|
|
|
|
2,826
|
|
|
|
2,681
|
|
|
|
|
|
Reinsurance premiums
ceded
|
|
|
(123
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
(377
|
)
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net renewal year
premium income
|
|
|
759
|
|
|
|
775
|
|
|
|
-2
|
%
|
|
|
2,450
|
|
|
|
2,452
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single premium
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
6
|
|
|
|
13
|
|
|
|
|
|
Reinsurance premiums
assumed
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium income
|
|
$
|
886
|
|
|
$
|
871
|
|
|
|
2
|
%
|
|
$
|
2,808
|
|
|
$
|
2,803
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium income levels for the three and nine month periods ended September 30, 2007 were
similar to those reported in the comparable prior year periods. Gross first year premium income in
2007 continues to trail the levels reported during 2006 primarily due to FLACs inability to write
new business in the state of Ohio during those periods and capital restrictions that limited its
ability to promote other new business. FLAC was released from its Memorandum of Understanding with
the Ohio Department of Insurance on May 3, 2007 and has now re-established relationships with
agents in that market. The significant decline in first year reinsurance premiums ceded is due to
the termination of the reinsurance treaty with Wilson Re for the life insurance companys Final
Expense product for policies issued after June 24, 2006.
Net renewal year premium income decreased slightly during the three and nine month periods ended
September 30, 2007 as compared to the prior year periods. Renewal premiums reflect the premium
collected in the current year for those policies that have surpassed their first policy
anniversary. Gross renewal premiums will continue to increase unless premiums lost from
surrenders, lapses, settlement options or application of the non-forfeiture options, exceed prior
years first year premium. The increases in reinsurance premiums ceded are due to policies ceded
to Wilton Re from January 1, 2005 to June 24, 2006 surpassing their first year policy anniversary.
Policy reserve expense for the three and nine month periods ended September 30, 2007 were
comparable to the same periods in 2006. Life insurance reserves are actuarially determined based
on such factors as insured age, life expectancy, mortality and interest assumptions. As more life
insurance is written and existing policies reach additional durations, policy reserve requirements
will continue to increase.
16
The Companys experience with death claims declined significantly during the third quarter of 2007
as those expenses were 42% above the levels reported during the same period in the prior year.
Death claims expense for the nine month period ended September 30, 2007 was 42% higher than the
same period in 2006 reflecting the higher level of claims filed during the current quarter as
compared to the same time period in 2006. As a result of recent payouts on death claims and a
decline in the number of claims filed, the Companys reported liability for policy claims is about
$136,000 at September 30, 2007 as compared to $212,000 at December 31, 2006.
Commission expense increased 4% and 13% during the three and nine month periods ended September 30,
2007 as compared to the prior year periods. Commission expense is based on a percentage of
premiums and is determined in the product design. Additionally, higher percentage commissions are
paid for first year business than renewal year. The slight increase in this expense during the
third quarter of 2007 is due to the termination of the reinsurance treaty with Wilton Re resulting
in a reduction in first year commission allowance.
Policy acquisition costs deferred increased 44% and 21% during the three and nine month periods
ended September 30, 2007 as compared to the same period in the prior year. These acquisition costs
result from the capitalization of costs related to the sales of life insurance and include
commissions on first year business, medical exam and inspection report fees, and salaries of
employees directly involved in the marketing, underwriting and policy issuance functions.
Management performs quarterly reviews of the recoverability of deferred acquisition costs based on
current trends as to persistency, mortality and interest. These trends are compared to the
assumptions used in the establishment of the original asset in order to assess the need for
impairment. Based on the results of the aforementioned procedures performed by management, no
impairments have been recorded against the balance of deferred acquisition costs.
Interest credited on annuities and premium deposits increased 41% and 38% during the three and nine
month periods ended September 30, 2007 as compared to the prior year periods. A similar increase was noted
during the first and second quarter of 2007 and reflects the increases in annuity fund balances due
to deposits of about $4,832,000 less surrenders of about $962,000 during the nine month period
ended September 30, 2007. Both interest credited on annuities and premium deposits have increased
as a result of the increase in the number of policies inforce. Increases in the Companys annuity
and policy benefit liabilities are largely related to increased sales of the Companys various
annuity and life insurance products.
The Companys available-for-sale fixed maturity securities increased to about $17,705,000 as a
result of its ability to invest funds generated from the sale of annuity and other insurance
products and other sources. Purchases of available-for-sale fixed maturity securities, net of
maturities were about $5,686,000. Net investment income was 38% and 31% higher during the three
and nine month periods ended September 30, 2007 as compared to the prior year periods primarily as
a result of this growth in the portfolio. During the third quarter of 2007, the market value of
the Companys available-for-sale fixed maturity and equity securities increased by about $154,000,
due primarily to changes in interest rates. As a result, the Companys other comprehensive income
was increased by about $123,000 for the three month period ended September 30, 2007. During the
nine month period ended September 30, 2007 the market values of the Companys available-for-sale
securities decreased by $278,000 resulting in a decrease in other comprehensive income of $222,000.
Corporate and other activities
During April 2007, the Company completed a tender offer, buying back 379,248 shares (126,416 post
split) of its stock for a price of $1.60 per share ($4.80 post split). Also in April, the Company
completed a 1-for-3 reverse stock split buying back 2,253 shares of common stock resulting from the
split. Direct costs associated with the purchase of these shares have been included as a part of
the overall cost of acquiring this Treasury stock.
17
The Companys application with the American Stock Exchange (AMEX) for an original listing of its
common stock was approved and trading in the Companys stock commenced on August 30, 2007 under the
symbol BCP.
On August 31, 2007, the Company entered into agreements with Brooke Corporation and its insurance
agency subsidiary, Brooke Franchise Corporation (Brooke Franchise), and Delta Plus Holdings, Inc.
(Delta Plus), the parent company of Traders Insurance Company, a non-standard auto insurance
company. Under these agreements, the Company would acquire 100% ownership interests in both Brooke
Franchise and Delta Plus in exchange for additional shares of its common stock. Upon closing of
these transactions, Brooke Corporation will own almost 82% of the Companys outstanding common
stock (based upon ownership levels at September 30, 2007).
Consulting, legal, filing and other fees related to the contemplated transactions involving Brooke
Franchise Corporation and Delta Plus and the application filed with the AMEX, represented
approximately $520,000 and have been charged to expense during the three months ended September 30,
2007. These costs, along with the loan brokerage and shared services expenses incurred during the
third quarter by BCA (described above) represent substantially all of the significant increases
noted in the Companys consolidated other operating costs and expenses during the three month
period ended September 30, 2007 as compared to the same period in the prior year. Similar
increases were noted during the first two quarters of 2007 as compared to the prior periods.
The Companys Chief Executive and Chief Financial Officers assumed their current positions on March
1, 2007. Their compensation related expenses, along with those previously discussed for BCA,
represent the major portion of the significant increases noted in the Companys consolidated
salaries, wages, and employee benefits expense during the three and nine month periods ended
September 30, 2007 as compared to the same periods in the prior year. In addition, the Company
made an approximate $150,000 severance payment to a former executive officer of a subsidiary who
tendered his resignation during the third quarter of 2007.
During the second quarter of 2007, the Company received $97,000 as a payout on its original
investment in the stock of an unaffiliated insurance holding company. The resulting gain of
$81,000 has been reported as income during the period.
The Company recorded consolidated income tax provisions of $338,000 and $1,226,000 during the three
and nine month periods ended September 30, 2007. In recording this provision, the Company has
recognized the benefit associated with utilization of available net operating loss carry-forward
amounts, subject to limitations under the tax code. The Companys deferred income tax asset and
valuation allowance related to the benefit associated with remaining net operating loss
carry-forward amounts have been reduced accordingly. Federal and state income taxes payable have
been reduced for income taxes receivable related to amounts withheld by taxing authorities on
certain lottery cash flow contracts held by the Company.
The Companys other assets included net receivables from affiliates of about $3,613,000 and
$1,196,000 at September 30, 2007 and December 31, 2006, respectively. Other liabilities and
salaries payable included amounts owed to affiliates of about $247,000 at September 30, 2007. The
Companys cash balances are sometimes commingled with the balances of Brooke and its other
subsidiaries for cash management purposes. The Company and its affiliates receive and/or pay
interest for the availability/use of these funds. As mentioned above, the Company recorded
$470,000 and $905,000, in expense during the three and nine month periods ended September 30, 2007,
respectively, in connection with shared services agreements with Brooke.
18
Liquidity and Capital Resources
During 2007, the Company maintained liquid assets sufficient to meet operating demands, while
continuing to utilize excess liquidity to make various investments. At September 30, 2007, the
Companys cash and cash equivalents and other liquid assets, in thousands, included the following
(as compared to December 31, 2006):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brooke Capital
|
|
|
Brooke Capital
|
|
|
First Life America
|
|
|
|
|
|
|
Corporation
|
|
|
Advisors
|
|
|
Corporation
|
|
|
Consolidated
|
|
Cash Equivalents
|
|
$
|
259
|
|
|
$
|
1,267
|
|
|
$
|
677
|
|
|
$
|
2,203
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
17,936
|
|
|
|
17,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
$
|
259
|
|
|
$
|
1,267
|
|
|
$
|
18,612
|
|
|
$
|
20,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
1,978
|
|
|
$
|
1
|
|
|
$
|
14,129
|
|
|
$
|
16,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of 2007, the Companys net cash provided by operations was
approximately $825,000 as compared to $330,000 during the first nine months of 2006. FLAC
generally receives adequate cash flow from premium collections and investment income to meet the
obligations of its insurance operations. Insurance policy liabilities are primarily long-term and
generally are paid from future cash flows. Cash collected from deposits on annuity contracts and
policyholder premium deposits are recorded as cash flows from financing activities.
Existing cash balances at the parent company-only combined with expected cash flows from its
brokerage subsidiary, income tax sharing arrangements and administrative services reimbursements
from FLAC are believed by management to be sufficient to fund the parents normal operations and
pay its corporate expenses and income taxes.
The nature of the Companys brokerage subsidiarys operations is such that it is not expected to
require any capital contributions in 2007. Instead, if BCA is successful in implementing its
marketing plans, it will likely be a source of cash to BCP. If the Companys life insurance
subsidiary, FLAC, is successful in implementing its marketing plans and its premiums increase
significantly as a result, then FLAC may require additional capital contributions in future periods
from the parent company. In this event, capital contributions are not expected to exceed
$1,000,000 and any such required contributions are expected to be funded internally.
As previously noted, the Companys stock commenced trading on the AMEX on August 30, 2007.
Management believes that such a listing will improve the Companys prospects for selling additional
equity securities, acquiring a business by merger or issuing debt. If another suitable life
insurance or brokerage acquisition opportunity arises, the Company may require additional capital.
In this event, the required capital for an acquisition is expected to be funded from the sale of
common or preferred equity to public or private investors.
During the third quarter of 2007, the Company granted certain stock awards to executive officers
and directors. Total compensation expense associated with those awards will aggregate $1,950,000
over their respective three year vesting periods ending on August 15, 2010. That expense is being
recorded ratably during the vesting period with $81,000 of such expense recorded during the current
quarter.
Capital Commitments
Substantially all of the Companys contractual commitments are future annuity and policy benefits.
The following table summarizes the Companys estimated contractual obligations for its annuity and
insurance liabilities by due date and expiration as of September 30, 2007:
|
|
|
|
|
Due within on year
|
|
$
|
1,985,000
|
|
Due in one to three years
|
|
|
4,527,000
|
|
Due in three to five years
|
|
|
5,184,000
|
|
Due after five years
|
|
|
13,193,000
|
|
|
|
|
|
Total
|
|
$
|
24,889,000
|
|
|
|
|
|
19
While annuity contracts have scheduled payments, the timing of the cash flows associated with
life insurance policies is uncertain and can vary significantly.
Unaudited Pro Forma Condensed Consolidated Statements of Income
The following unaudited pro forma condensed consolidated statements of income for the three and
nine month periods ended September 30, 2007 and 2006 are provided to illustrate how the Companys
results of operations would have been reported, assuming the proposed
transactions contemplated by the Merger Agreement and Exchange Agreement
(discussed in greater detail in the Related Party Transactions section of this report) took place
on January 1, 2006. Pro forma basic and diluted earnings per share information is presented based
upon the planned issuance of 5,500,000 shares of the Companys common stock in accordance with the
Merger Agreement and Exchange Agreement. (Amounts presented are in thousands except for share data.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brooke Capital
|
|
|
Brooke Franchise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Corporation
|
|
|
Delta
|
|
|
Proforma
|
|
|
Proforma
|
|
|
2007
|
|
|
|
For three months
|
|
|
For three months
|
|
|
For three months
|
|
|
For three months
|
|
|
For three months
|
|
|
%increase
|
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
(decrease)
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
over 2006
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premium income
|
|
$
|
1,001
|
|
|
$
|
|
|
|
$
|
2,865
|
|
|
$
|
3,866
|
|
|
$
|
3,495
|
|
|
|
11
|
%
|
Reinsurance premiums assumed
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums ceded
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
(143
|
)
|
|
|
-15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium income
|
|
|
886
|
|
|
|
|
|
|
|
2,865
|
|
|
|
3,751
|
|
|
|
3,352
|
|
|
|
12
|
%
|
Insurance commissions
|
|
|
|
|
|
|
27,918
|
|
|
|
48
|
|
|
|
27,966
|
|
|
|
25,430
|
|
|
|
10
|
%
|
Consulting fees
|
|
|
3,295
|
|
|
|
162
|
|
|
|
3
|
|
|
|
3,460
|
|
|
|
805
|
|
|
|
330
|
%
|
Gain on sale of businesses
|
|
|
|
|
|
|
247
|
|
|
|
|
|
|
|
247
|
|
|
|
180
|
|
|
|
37
|
%
|
Initial franchise fee basic services
|
|
|
|
|
|
|
5,940
|
|
|
|
|
|
|
|
5,940
|
|
|
|
8,670
|
|
|
|
-31
|
%
|
Initial franchise fee buyers assistance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
|
|
|
|
Net investment income
|
|
|
391
|
|
|
|
94
|
|
|
|
124
|
|
|
|
609
|
|
|
|
471
|
|
|
|
29
|
%
|
Net realized investment gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
Other income
|
|
|
60
|
|
|
|
725
|
|
|
|
25
|
|
|
|
810
|
|
|
|
663
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
4,632
|
|
|
|
35,086
|
|
|
|
3,065
|
|
|
|
42,783
|
|
|
|
40,056
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in policy reserves
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
208
|
|
|
|
-6
|
%
|
Policy holder surrender values
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
103
|
|
|
|
17
|
%
|
Interest credited on annuities & deposits
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
|
|
151
|
|
|
|
40
|
%
|
Death claims
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
183
|
|
|
|
42
|
%
|
Policy acquisition costs deferred
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
|
|
(167
|
)
|
|
|
44
|
%
|
Commission expense
|
|
|
202
|
|
|
|
21,912
|
|
|
|
(164
|
)
|
|
|
21,950
|
|
|
|
20,483
|
|
|
|
7
|
%
|
Payroll expense
|
|
|
838
|
|
|
|
5,036
|
|
|
|
492
|
|
|
|
6,366
|
|
|
|
7,581
|
|
|
|
-16
|
%
|
Depreciation and amortization
|
|
|
224
|
|
|
|
430
|
|
|
|
25
|
|
|
|
679
|
|
|
|
238
|
|
|
|
185
|
%
|
Insurance loss and loss expense
|
|
|
|
|
|
|
|
|
|
|
1,518
|
|
|
|
1,518
|
|
|
|
1,942
|
|
|
|
-22
|
%
|
Other operating expense
|
|
|
1,712
|
|
|
|
7,306
|
|
|
|
(23
|
)
|
|
|
8,995
|
|
|
|
11,114
|
|
|
|
-19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,524
|
|
|
|
34,684
|
|
|
|
1,848
|
|
|
|
40,056
|
|
|
|
41,836
|
|
|
|
-4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,108
|
|
|
|
402
|
|
|
|
1,217
|
|
|
|
2,727
|
|
|
|
(1,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
699
|
|
|
|
10
|
|
|
|
709
|
|
|
|
542
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
|
|
|
|
699
|
|
|
|
10
|
|
|
|
709
|
|
|
|
542
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,108
|
|
|
|
(297
|
)
|
|
|
1,207
|
|
|
|
2,018
|
|
|
|
(2,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
338
|
|
|
|
(113
|
)
|
|
|
456
|
|
|
|
681
|
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
770
|
|
|
$
|
(184
|
)
|
|
$
|
751
|
|
|
$
|
1,337
|
|
|
$
|
(1,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
Basic weighted average shares
|
|
|
3,196,034
|
|
|
|
|
|
|
|
|
|
|
|
8,696,034
|
|
|
|
6,919,019
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
Diluted weighted average shares
|
|
|
3,198,571
|
|
|
|
|
|
|
|
|
|
|
|
8,698,571
|
|
|
|
6,919,019
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brooke Capital
|
|
|
Brooke Franchise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Corporation
|
|
|
Delta
|
|
|
Proforma
|
|
|
Proforma
|
|
|
2007
|
|
|
|
For nine months
|
|
|
For nine months
|
|
|
For nine months
|
|
|
For nine months
|
|
|
For nine months
|
|
|
% increase
|
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
ended Sep 30,
|
|
|
(decrease)
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
over 2006
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premium income
|
|
$
|
3,188
|
|
|
$
|
|
|
|
$
|
8,952
|
|
|
$
|
12,140
|
|
|
$
|
10,482
|
|
|
|
16
|
%
|
Reinsurance premiums assumed
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
9
|
|
|
|
78
|
%
|
Reinsurance premiums ceded
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
(396
|
)
|
|
|
(456
|
)
|
|
|
-13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium income
|
|
|
2,808
|
|
|
|
|
|
|
|
8,952
|
|
|
|
11,760
|
|
|
|
10,035
|
|
|
|
17
|
%
|
Insurance commissions
|
|
|
|
|
|
|
87,541
|
|
|
|
1,147
|
|
|
|
88,688
|
|
|
|
78,752
|
|
|
|
13
|
%
|
Consulting fees
|
|
|
7,540
|
|
|
|
1,589
|
|
|
|
491
|
|
|
|
9,620
|
|
|
|
3,189
|
|
|
|
202
|
%
|
Gain on sale of businesses
|
|
|
|
|
|
|
2,089
|
|
|
|
|
|
|
|
2,089
|
|
|
|
3,061
|
|
|
|
-32
|
%
|
Initial franchise fee basic services
|
|
|
|
|
|
|
25,905
|
|
|
|
|
|
|
|
25,905
|
|
|
|
22,725
|
|
|
|
14
|
%
|
Initial franchise fee buyers assistance
|
|
|
|
|
|
|
455
|
|
|
|
|
|
|
|
455
|
|
|
|
2,937
|
|
|
|
-85
|
%
|
Net investment income
|
|
|
1,067
|
|
|
|
267
|
|
|
|
354
|
|
|
|
1,688
|
|
|
|
1,355
|
|
|
|
25
|
%
|
Net realized investment gain (loss)
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
15
|
|
|
|
440
|
%
|
Other income
|
|
|
179
|
|
|
|
2,060
|
|
|
|
144
|
|
|
|
2,383
|
|
|
|
1,937
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
11,675
|
|
|
|
119,906
|
|
|
|
11,088
|
|
|
|
142,669
|
|
|
|
124,006
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in policy reserves
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
677
|
|
|
|
643
|
|
|
|
5
|
%
|
Policy holder surrender values
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
251
|
|
|
|
6
|
%
|
Interest credited annuities & deposits
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
|
578
|
|
|
|
420
|
|
|
|
38
|
%
|
Death claims
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
677
|
|
|
|
478
|
|
|
|
42
|
%
|
Policy acquisition costs deferred
|
|
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
(729
|
)
|
|
|
(604
|
)
|
|
|
21
|
%
|
Commission expense
|
|
|
700
|
|
|
|
66,879
|
|
|
|
(884
|
)
|
|
|
66,695
|
|
|
|
59,204
|
|
|
|
13
|
%
|
Payroll expense
|
|
|
2,067
|
|
|
|
16,021
|
|
|
|
3,108
|
|
|
|
21,196
|
|
|
|
22,151
|
|
|
|
-4
|
%
|
Depreciation and amortization
|
|
|
645
|
|
|
|
476
|
|
|
|
93
|
|
|
|
1,214
|
|
|
|
777
|
|
|
|
56
|
%
|
Insurance loss and loss expense
|
|
|
|
|
|
|
|
|
|
|
5,222
|
|
|
|
5,222
|
|
|
|
4,073
|
|
|
|
28
|
%
|
Other operating expense
|
|
|
3,065
|
|
|
|
31,083
|
|
|
|
2,207
|
|
|
|
36,355
|
|
|
|
31,009
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,947
|
|
|
|
114,459
|
|
|
|
9,746
|
|
|
|
132,152
|
|
|
|
118,402
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,728
|
|
|
|
5,447
|
|
|
|
1,342
|
|
|
|
10,517
|
|
|
|
5,604
|
|
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
1,957
|
|
|
|
127
|
|
|
|
2,084
|
|
|
|
1,572
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
|
|
|
|
1,957
|
|
|
|
127
|
|
|
|
2,084
|
|
|
|
1,572
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,728
|
|
|
|
3,490
|
|
|
|
1,215
|
|
|
|
8,433
|
|
|
|
4,032
|
|
|
|
109
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,226
|
|
|
|
1,326
|
|
|
|
367
|
|
|
|
2,919
|
|
|
|
1,656
|
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,502
|
|
|
$
|
2,164
|
|
|
$
|
848
|
|
|
$
|
5,514
|
|
|
$
|
2,376
|
|
|
|
132
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
$
|
0.64
|
|
|
$
|
0.34
|
|
|
|
|
|
Basic weighted average shares
|
|
|
3,108,422
|
|
|
|
|
|
|
|
|
|
|
|
8,608,422
|
|
|
|
6,919,019
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
$
|
0.64
|
|
|
$
|
0.34
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
3,109,277
|
|
|
|
|
|
|
|
|
|
|
|
8,609,277
|
|
|
|
6,919,019
|
|
|
|
|
|
21
Recently Issued Accounting Standards
On July 14, 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes
guidance to address inconsistencies among entities with the measurement and recognition in
accounting for income tax positions for financial statement purposes. Specifically, FIN 48
addresses the timing of the recognition of income tax benefits. FIN 48 requires the financial
statement recognition of an income tax benefit when the company determines that it is
more-likely-than-not that the tax position will be ultimately sustained. FIN 48 is effective for
fiscal years beginning after December 15, 2006, which, for the Company, is fiscal year 2007. The
Company does not anticipate a material effect on its consolidated financial statements as a result
of the issuance of FIN 48.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides enhanced
guidance for using fair value measurements in financial reporting. While the standard does not
expand the use of fair value in any new circumstance, it has applicability to several current
accounting standards that require or permit entities to measure assets and liabilities at fair
value. This standard defines fair value, establishes a framework for measuring fair value in GAAP
and expands disclosures about fair value measurements. Application of this standard is required
for the Company beginning in 2008. Management is currently assessing what impact, if any, the
application of this standard could have on the Companys reported results of operations and
financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement is effective for an entitys
first fiscal year that begins after November 15, 2007, which, for the Company, is fiscal year 2008.
Management is currently assessing what impact, if any, the application of this standard could have
on the Companys reported results of operations and financial position.
Related Party Transactions
On March 2, 2005, the Company entered into a Stock Repurchase Agreement with Brooke under which the
Company repurchased 450,500 shares of Company common stock from Brooke. Brooke had previously
acquired the shares from a third party for a total purchase price of $772,255. The privately
negotiated transaction involved approximately 9.7 % of Company common stock then outstanding. The
shares were purchased at a price of $1.71 per share for a total purchase price of $770,355. The
Company paid the purchase price using $200,000 of its working capital and financed the remaining
amount with a loan from Brooke Credit Corporation, an affiliate of Brooke, at a fixed rate of 8%
over a ten-year period. The repurchase agreement also granted Brooke warrants to purchase up to
150,000 shares of Company common stock at prices ranging from $1.71 to $5.00 per share. These
warrants were cancelled as part of the 2006 Stock Purchase Agreement (as later defined).
The mortgage note on the commercial property and office building that the Company owned was
financed by Vision Bank of Topeka, Kansas. Gary Yager, a former Director of the Company, is the
President and CEO of Vision Bank. As of December 31, 2006 the mortgage note was paid in full.
Management believes that the terms obtained from Vision Bank at the time of financing were no less
favorable to the Company than those available from an independent lender.
The Boards of Directors of the Company and FLAC and the Kansas Insurance Department (KID)
authorized the parent company to sell its office building and related real estate to FLAC. The
proceeds were used in part to repay the notes to Vision Bank and Brooke described above. Closing
of this transaction occurred May 1, 2006.
On October 5, 2006, Mr. Van Engelen, a then officer and director of the Company, was awarded a
warrant to purchase up to 50,000 shares of Company common stock at an exercise price of $1.72 per
share (16,666 shares at an exercise price of $5.16 per share after the 1-for-3 reverse stock split
effective April 13, 2007). The warrant was awarded to Mr. Van Engelen in exchange for his services
in successfully negotiating and closing the transactions contemplated by the 2006 Stock Purchase
Agreement. Mr. Van Engelen entered into an employment agreement with the Company effective
December 8, 2006 to serve as President and CEO of FLAC. He resigned his positions with FLAC in
July 2007 and has been paid all amounts due him under the terms of his employment agreement with
the Company. Mr. Van Engelen also resigned as a director of FLAC and Brooke Capital Advisors.
22
On October 5, 2006, Thomas Fogt, a then director of the Company, was awarded a warrant to purchase
up to 100,000 shares of Company common stock at an exercise price of $1.72 per share (33,333 shares
at an exercise price of $5.16 per share after the 1-for-3 reverse stock split). Mr. Fogt was
awarded the warrant in exchange for his services in successfully negotiating and closing the
transactions proposed by the 2006 Stock Purchase Agreement.
The Company entered into a Stock Purchase and Sale Agreement dated October 6, 2006 (the 2006 Stock
Purchase Agreement) with Brooke that provided for a series of transactions that resulted in the
acquisition by Brooke of a majority of the Companys outstanding common stock. As more fully
discussed in Description of Business Recent Developments and Market for Common Equity and
Related Stockholder Matters Sales of Unregistered Securities sections of the Companys Form
10-KSB for the fiscal year ended December 31, 2006, Brooke had or has a direct and/or indirect
material interest in the 2006 Stock Purchase Agreement. Brooke also has a direct interest in
the Merger Agreement and the Exchange Agreement. As a result of
his relationship with Brooke, Robert D. Orr, a Company director and the Companys Chairman of the
Board, President and Chief Executive Officer, has an indirect material interest in these
transactions.
On August 31, 2007, the Company entered into the Merger Agreement with Brooke and Brooke Franchise.
On the same date, the Company entered into the Exchange Agreement under which the Company will
acquire all of the outstanding common stock of Delta Plus. Delta Plus is currently a wholly-owned
subsidiary of Brooke and the parent company of Traders Insurance Company, a non-standard auto
insurance company.
Pursuant to the Merger Agreement, Brooke Franchise will be merged with and into the Company with
the surviving entity operating under the name of Brooke Capital Corporation. At closing Brooke
will receive merger consideration of 5,000,000 shares of the Companys common stock. Brooke will
receive 2,250,000 additional shares of the Companys common stock should the post-merger insurance
agency unit achieve certain performance benchmarks in 2007 and 2008.
Under the Exchange Agreement, Brooke will contribute to the Company all of the outstanding stock of
Delta Plus for consideration equal to 500,000 shares of the Companys common stock. Brooke will
receive 250,000 additional shares of the Companys common stock should Delta Plus achieve certain
performance benchmarks in 2007 and 2008.
The
Independent Directors Committee of the Company has received a written opinion that the Companys common stock to be paid in connection
with the Merger Agreement and the Exchange Agreement is fair to the Company, from a financial point
of view.
The Merger Agreement and the Exchange Agreement were both approved by the shareholders of the
Company in their meeting on November 5, 2007. Both transactions are subject to additional closing
conditions and certain regulatory approvals. Closing of the Exchange Agreement is subject to the
closing of the Merger Agreement. Effectuation of the merger contemplated by the Merger Agreement
is not subject to the closing of the Exchange Agreement. The Merger Agreement is also subject to
receipt of a written opinion that Brooke Franchise is solvent prior to the merger and that the
surviving corporation in the merger (on a consolidated basis) is solvent immediately after the
merger. In addition, the closing of the Exchange Agreement is subject to receipt of a written
opinion that Delta Plus is solvent prior to the merger and that the Company (on a consolidated
basis including Brooke Franchise and Delta Plus) is solvent immediately after the merger.
Upon consummation of, the Merger Agreement and the Exchange Agreement, Brooke will own (based on
ownership levels at September 30, 2007) a minimum of approximately 81% and a maximum of
approximately 85% of the Companys common stock. Brooke has agreed that it will not transfer the
Companys common stock it receives in these transactions for 180 days after the closing date,
unless the Company otherwise agrees.
Effective
with the consummation of the merger, Kyle L. Garst will become President, Chief Executive
Officer and a Director of the Company and Dane S. Devlin will become Executive Vice President,
Chief Operating Officer and a Director of the Company. Robert Orr will continue as Chairman of
the Board of Directors of the Company.
Prior to entering into the
Merger Agreement and the Exchange Agreement, the Company contracted to acquire all of the
issued and outstanding shares of capital stock of Brooke Savings Bank from Brooke Brokerage
Corporation, a wholly owned subsidiary of Brooke, in exchange for 2,015,968 shares of
Company common stock, subject to adjustment in the event of certain changes to the Companys
capitalization, Pursuant to the terms of the purchase agreement (the
Bank Purchase Agreement), the closing of the transaction is subject to approval by
the United States Office of Thrift Supervision, other regulatory approvals, and other
standard closing conditions, The Companys application to acquire the bank was approved
by the Office of Thrift Supervision, All other regulatory approvals
have been received.
Recently, Brooke and BBC
requested that the Company and BBC terminate the Bank Purchase Agreement by mutual agreement.
After consideration of the request and the Companys current strategic
direction into insurance agency franchising and sale of propriety non-standard auto
insurance (as evidenced by the Merger Agreement and the Exchange Agreement), the
Companys Board of Directors determined that termination of the Bank Purchase
Agreement would be in the best interest of the Company and its stockholders, provided
termination is subject to the prior closing of the Merger Agreement. Termination would also
be subject to the Company being reimbursed for all or a portion of the costs and expenses
incurred by it in pursuing the transaction at such levels as the Companys Independent
Directors Committee determines to be fair and adequate to the Company, The Boards
decision followed a determination by the Independent Directors Committee that such a
termination, subject to these same conditions, would be in the best interests of the
Companys stockholders other than Brooke Corporation, Accordingly, based on these
determinations, the Company will terminate its agreement to acquire the bank from BBC,
when and if these events occur.
23
BCA entered into a services agreement with Brooke on March 21, 2007 that, in addition to other
benefits to BCA, provided for the transfer of certain additional loan brokerage activities that
were not a part of the original transfer of loan brokerage activities provided for in the 2006
Stock Purchase Agreement between the Company and Brooke. This services agreement provides for
monthly fees totaling $145,000, beginning in April 2007 and continuing until December 2007. In
addition, the parent is a party to a services agreement with Brooke for which it pays monthly fees
of $5,000 per month during the same nine month period ending December 31, 2007.
Included in the Companys other assets are certain net receivables from affiliates of about
$3,876,000 and $1,196,000 at September 30, 2007 and December 31, 2006, respectively. These amounts
represent fees earned by BCA in connection with its ongoing collateral preservation and loan
brokerage activities as well as other amounts loaned to affiliates at September 30, 2007on a
short-term basis for which the Company is paid interest based upon the amounts and time
outstanding. Other liabilities and salaries payable at September 30, 2007 included amounts due to
affiliates of about $247,000 of which $150,000 represented the amount due for one months shared
services fees. As indicated above, the Companys cash balances are sometimes commingled with the
balances of Brooke and its other subsidiaries for cash management purposes.
The Company has employed Robert D. Orr, as CEO of the Company and William R. Morton Jr., as CFO of
the Company. These individuals are also employed by Brooke or its other subsidiaries. The Company
reimburses Brooke and certain of its affiliates for the payroll related costs of these and other
employees.
Impact of Inflation and General Economic Conditions
The Companys liquidity and capital resources are subject to inflation and general market
conditions. The Company is primarily invested in fixed maturity securities. A majority of these
assets are debt securities and are considered fixed income investments. In addition, the Company
has investments in mortgage loans. Both of these investments are exposed to three primary sources
of investment risk: credit, interest rate and liquidity. In addition, the Companys investments
are subject, in varying degrees, to market risk that can affect their return and their fair market
value.
Interest rate risk arises from the price sensitivity of investments to changes in interest rates.
Coupon and/or dividend income represent the greatest portion of an investments total return for
most fixed income instruments in stable interest rate environments. The changes in the fair market
values of such investments are inversely related to changes in market interest rates. As interest
rates fall, the coupon and dividend streams of existing fixed rate investments become more valuable
and the market values rise. As interest rates rise, the opposite effect occurs.
The Companys mortgage loan investments are also particularly sensitive to interest rate changes.
As long-term rates fall, borrowers become more likely to refinance their mortgages causing a
prepayment of outstanding mortgage principal that requires reinvestment at lower rates. As
interest rates rise, policyholders may become more likely to surrender policies or to borrow
against cash values, often to meet sudden needs in an inflationary environment or to invest in
higher yielding opportunities elsewhere. This risk of disintermediation may force the Company to
liquidate part of its portfolio at a time when the fair market values of fixed income investments
are falling.
A majority of the Companys investments are exposed to varying degrees of credit risk. Credit risk
is the risk that the value of the investment may decline due to the deterioration of the financial
strength of the issuer and that the timely or ultimate payment of principal or interest may occur.
The Company mitigates credit risk by diversifying the investment portfolio across a broad range of
issuers, investment sectors and security types and by timing the amount of investments in any
particular entity.
24
ITEM 3. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
The Company maintains controls and procedures designed to
ensure that information required to be disclosed in the reports that the Company files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange Commission and the
information is accumulated and communicated to the Companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosure. The Companys Chief Executive Officer and Chief Financial Officer conducted an
evaluation of the Companys disclosure controls and procedures as of the end of the period covered
by this report. Based upon the evaluation of those controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures
are effective in alerting management on a timely basis, of material information required to be
disclosed in the Companys reports as set forth in this section.
In connection with its review of the financial statements filed with the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2005, the Companys independent public accounting firm
advised management that it had noted certain matters that it considered to be a material
weakness. A material weakness is a significant deficiency, or a combination of significant
deficiencies, in the Companys internal financial procedures or controls, that results in more than
a remote likelihood that a material misstatement of the Companys financial statements will not be
prevented or detected. The auditors noted that due to the resignation of the Companys then Chief
Financial Officer effective March 31, 2006, the Company did not then have adequate review
procedures in place to ensure the development of timely, complete and accurate financial statements
and related footnotes.
Since March 31, 2006, the Company has taken significant steps to remediate this material weakness,
including enhancing the knowledge and skills of the existing staff, hiring outside consultants and
independent contractors to assist the staff in handling financial statement matters, and engaging
as a full-time consultant an individual who had previously served as the Companys controller and
who during that tenure was primarily responsible for preparing both the Companys statutory and
GAAP financial statements. On March 1, 2007, the Board of Directors elected Mr. Morton as the new
Chief Financial Officer replacing John Van Engelen, the President and Chief Executive Officer of
FLAC, who served in an interim capacity as the Chief Financial Officer of the Company from January
31, 2007 to March 1, 2007.
With these remediation steps remaining in place and the addition of the functional financial
support provided by Brooke pursuant to the Brooke Servicing Agreement referred to above, management
believes that the material weakness has been remediated and that the Companys internal control
over financial reporting as of the date of this report is effective at a reasonable assurance level
and has been for a period of time prior hereto. In connection with its review of the financial
statements filed with the Companys Annual Report on Form 10-KSB, for the year ended December 31,
2006, the Companys independent public accounting firm has advised management that it has not
identified any matters that it considered to represent material weaknesses.
Internal Control Over Financial Reporting.
There were no changes in the Companys internal control
over financial reporting that have materially affected, or are reasonably likely to affect, the
Companys internal control over financial reporting for the quarter ended September 30, 2007. We
have undertaken remediation efforts, as discussed above. These staffing additions and training
efforts are in response to the material weaknesses identified.
25
PART II
OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 6. EXHIBITS
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|
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Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Agreement and Plan of Merger by and between Brooke, the Company and Brooke Franchise, dated
August 31, 2007, incorporated herein by reference to Annex A of the Companys Definitive
Information Statement on Schedule 14C filed on October 16, 2007 (the Definitive Information
Statement).
|
|
|
|
2.2
|
|
Agreement and Plan of Merger by and between Brooke, the Company and Brooke Franchise, as
amended September 24, 2007, incorporated herein by reference to Annex A of the Definitive
Information Statement.
|
|
|
|
2.3
|
|
Exchange Agreement by and between Brooke, the Company and Delta Plus, dated August 31, 2007,
incorporated herein by reference to Annex B of the Definitive Information Statement.
|
|
|
|
2.4
|
|
Exchange Agreement by and between Brooke, the Company, and Delta Plus, as amended September
24, 2007, incorporated herein by reference to Annex B of the Definitive Information Statement.
|
|
|
|
3.1
|
|
Articles of Incorporation of First American Capital Corporation, incorporated by reference
from Exhibit 2.1 to the Companys amended Form 10-SB filed August 13, 1999.
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|
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3.2
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|
Certificate of Amendment of Articles of Incorporation of First American Capital Corporation
adopted January 31, 2007, incorporated by reference from Exhibit 3.1 to the Companys 8-K
filed on February 2, 2007.
|
|
|
|
3.3
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|
Certificate of Amendment of Articles of Incorporation of First American Capital Corporation
adopted June 7, 2007, incorporated by reference to Exhibit 3.3 of the Companys Form 10-QSB
filed on July 27, 2007.
|
|
|
|
3.4
|
|
Copy of the Articles of Incorporation of First American Capital Corporation, as amended by
the Certificate of Amendment adopted January 31, 2007 and the Certificate of Amendment adopted
June 7, 2007, incorporated by reference to Exhibit 3.4 of the Companys Form 10-QSB filed on
July 27, 2007.
|
|
|
|
3.5
|
|
Bylaws of First American Capital Corporation, as amended, Incorporated by reference from
Exhibit 3.2 to the Companys Form 8-K filed April 11, 2005.
|
|
|
|
3.6
|
|
Amendment to Amended and Restated Bylaws dated April 7, 2007 adopted on June 7, 2007,
incorporated by reference to Exhibit 3.1 to the Companys Form 8-K dated June 7, 2007.
|
26
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
3.7
|
|
Copy of Amended and Restated Bylaws of First American Capital Corporation, as amended by the
Board of Directors on June 7, 2007, incorporated by reference to Exhibit 3.7 to the Companys
Form 10-QSB filed on July 27, 2007.
|
|
|
|
4
|
|
Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations, and Restrictions Thereof of
6% Non-Cumulative, Convertible, Callable Preferred Stock, Incorporated by reference from
Exhibit 3 to the Companys amended Form 10-SB filed August 13, 1999.
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|
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (*)
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31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (*)
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|
|
|
32.1
|
|
Certificate of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350 (*)
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|
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32.2
|
|
Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350 (*)
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27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BROOKE CAPITAL CORPORATION
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|
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Date: November 6, 2007
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By:
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/s/ ROBERT D. ORR
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Robert D. Orr
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|
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President and Chief Executive Officer
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|
|
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Date: November 6, 2007
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By:
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/s/ WILLIAM R. MORTON, JR.
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William R. Morton, Jr.
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|
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Chief Financial Officer and Treasurer
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|
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28
EXHIBIT INDEX
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Agreement and Plan of Merger by and between Brooke, the Company and Brooke Franchise, dated
August 31, 2007, incorporated herein by reference to Annex A of the Companys Definitive
Information Statement on Schedule 14C filed on October 16, 2007 (the Definitive Information
Statement).
|
|
|
|
2.2
|
|
Agreement and Plan of Merger by and between Brooke, the Company and Brooke Franchise, as
amended September 24, 2007, incorporated herein by reference to Annex A of the Definitive
Information Statement.
|
|
|
|
2.3
|
|
Exchange Agreement by and between Brooke, the Company and Delta Plus, dated August 31, 2007,
incorporated herein by reference to Annex B of the Definitive Information Statement.
|
|
|
|
2.4
|
|
Exchange Agreement by and between Brooke, the Company, and Delta Plus, as amended September
24, 2007, incorporated herein by reference to Annex B of the Definitive Information Statement.
|
|
|
|
3.1
|
|
Articles of Incorporation of First American Capital Corporation, incorporated by reference
from Exhibit 2.1 to the Companys amended Form 10-SB filed August 13, 1999.
|
|
|
|
3.2
|
|
Certificate of Amendment of Articles of Incorporation of First American Capital Corporation
adopted January 31, 2007, incorporated by reference from Exhibit 3.1 to the Companys 8-K
filed on February 2, 2007.
|
|
|
|
3.3
|
|
Certificate of Amendment of Articles of Incorporation of First American Capital Corporation
adopted June 7, 2007, incorporated by reference to Exhibit 3.3 of the Companys Form 10-QSB
filed on July 27, 2007.
|
|
|
|
3.4
|
|
Copy of the Articles of Incorporation of First American Capital Corporation, as amended by
the Certificate of Amendment adopted January 31, 2007 and the Certificate of Amendment adopted
June 7, 2007, incorporated by reference to Exhibit 3.4 of the Companys Form 10-QSB filed on
July 27, 2007.
|
|
|
|
3.5
|
|
Bylaws of First American Capital Corporation, as amended, Incorporated by reference from
Exhibit 3.2 to the Companys Form 8-K filed April 11, 2005.
|
|
|
|
3.6
|
|
Amendment to Amended and Restated Bylaws dated April 7, 2007 adopted on June 7, 2007,
incorporated by reference to Exhibit 3.1 to the Companys Form 8-K dated June 7, 2007.
|
|
|
|
3.7
|
|
Copy of Amended and Restated Bylaws of First American Capital Corporation, as amended by the
Board of Directors on June 7, 2007, incorporated by reference to Exhibit 3.7 to the Companys
Form 10-QSB filed on July 27, 2007.
|
|
|
|
4
|
|
Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations, and Restrictions Thereof of
6% Non-Cumulative, Convertible, Callable Preferred Stock, Incorporated by reference from
Exhibit 3 to the Companys amended Form 10-SB filed August 13, 1999.
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (*)
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (*)
|
|
|
|
32.1
|
|
Certificate of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350 (*)
|
|
|
|
32.2
|
|
Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350 (*)
|
29
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